Why Retail Investors Consistently Lose Money Trading Options
Options contracts grant holders the right, but not the obligation, to buy or sell an asset at a fixed price by a set date. While these instruments are powerful tools for sophisticated risk management and hedging, the reality for retail investors is starkly different. A combination of commission-free trading platforms, aggressive marketing, financial influencers, and the meme stock phenomenon has driven a surge in retail options activity, much of which resembles speculative gambling rather than prudent investing.
Experimental research reveals a dangerous behavioural pattern: when individuals observe the success of top performers, they significantly increase their own risk-taking. This social influence, amplified by social media where only winning trades are typically showcased, creates a distorted perception of achievable outcomes. The data, however, paints a clear and sobering picture of the results for the average retail participant.
- A study in the Journal of Finance estimated retail investors lost an aggregate $2.1 billion from options trading between November 2019 and June 2021.
- Simulations show over 75% of options trades lose money, with over half of option portfolios losing more than 90% of their value.
- Research on 68,000 accounts found losses from options trading were “much larger” than those from equity trading.
The profile of the typical retail options trader further underscores the speculative nature of this activity. Studies indicate that single men with lower incomes and little investment experience trade options the most, and they do not use them to hedge existing stock positions. This points to gambling and sensation-seeking as the primary motives.
Transaction costs are a critical and often hidden factor in these poor results. While brokerages promote low or zero commissions, the true cost lies in the bid-ask spread.
- 50% of retail trades are in risky options with less than a week to expiration, carrying an average bid-ask spread of 12.6%.
- Trades on at-the-money or slightly out-of-the-money options, which are retail favourites, have an average quoted bid-ask spread of 29%.
- These enormous costs create a immediate and significant hurdle to achieving any profit.
Further analysis reveals retail investors display three wealth-depleting behaviours: they overpay for options relative to realised volatility, incur enormous bid-ask spreads, and respond sluggishly to market announcements. These missteps translate to average losses of 5% to 9%, which can balloon to 10% to 14% around high-volatility events.
As platforms begin offering complex multi-leg options strategies, the situation appears to be worsening. A 2023 study found retail trades in these complex options returned -16.4% on average over just three days, with losses increasing directly with strategy complexity. This suggests investors are lured by leverage and lottery-like payoffs without understanding the inherent risk-return trade-offs.
Financial markets are highly competitive arenas where retail investors are at a significant disadvantage against institutional players who possess superior resources, information, and knowledge. When trading options, retail investors are effectively transacting with these sophisticated participants who profit at their expense.
Putting It Into Practice: Actionable Steps for Investors
For the vast majority of investors, particularly those focused on long-term wealth building, engaging in options trading is a high-risk, low-probability strategy. The evidence consistently shows it is far more likely to destroy wealth than to create it.
- Acknowledge the Reality: Understand that the incredible success stories are extreme outliers. The most probable outcome for a retail options trader is significant financial loss.
- Ignore the Hype: Be highly sceptical of social media posts and platform marketing that promote options trading as an easy path to riches. These are often designed to drive engagement and brokerage profits.
- Focus on Fundamentals: Long-term wealth creation is a process best achieved through consistent saving and investing in a diversified, low-cost portfolio—not by chasing lottery-like payoffs.
- Seek Professional Advice: If considering the use of options for legitimate hedging purposes, consult a qualified, fee-only financial adviser who is not incentivised to sell specific products or generate commission-based trades.
Ultimately, the options market is a place where retail investors often find themselves on the menu rather than at the table. For those seeking to grow and preserve their capital, a disciplined, evidence-based investment approach remains the most reliable strategy.